Professional Documents
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GENERAL CONCEPTS
CHECK - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the
NEGOTIABLE INSTRUMENT (NI) most common form of bill of exchange.
A written contract for the payment of money which complies with the requirements of
Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money OTHER FORMS OF NI
and passes from hand to hand as money, so as to give the holder in due course (HDC) the 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to
right to hold the instrument free from defenses available to prior parties. (Reviewer on bearer
Commercial Law, Professors Sundiang and Aquino) 2. Trade acceptance
Functions: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.) 3. Bonds, which are in the nature of promissory notes
1. To supplement the currency of the government. 4. Drafts, which are bills of exchange drawn by one bank upon another
2. To substitute for money and increase the purchasing medium. 5. Debenture
Legal tender – That kind of money which the law compels a creditor to accept in All of these must comply with Sec. 1, NIL.
payment of his debt when tendered by the debtor in the right amount. Note: Letters of credit are not negotiable because they are issued to a specified person.
Note: A NI although intended to be a substitute for money, is not legal tender. However, a
check that has been cleared and credited to the account of the creditor shall be equivalent Instances when a BE may be treated as a PN
to delivery to the creditor of cash. (Sec. 60, NCBA) a. The drawer and the drawee are the same person; or
Features: (Reviewer on Commercial Law, Professors Sundiang and Aquino) b. Drawee is a fictitious person; or
1. Negotiability – That attribute or property whereby a bill or note or check may pass c. Drawee does not have the capacity to contract. (Sec. 130)
from hand to hand similar to money, so as to give the holder in due course the right d. Where the bill is drawn on a person who is legally absent;
to hold the instrument and to collect the sum payable for himself free from e. Where the bill is ambiguous (Sec. 17[e])
defenses.
The essence of negotiability which characterizes a negotiable paper as a Parties to a NI
credit instrument lies in its freedom to circulate freely as a substitute for 1. Promissory Note
money. (Firestone Tire vs. CA, 353 SCRA 601) a. Maker – one who makes promise and signs the instrument
2. Accumulation of Secondary Contracts – Secondary contracts are picked up and b. Payee – party to whom the promise is made or the instrument is payable.
carried along with NI as they are negotiated from one person to another; or in the 2. Bill of Exchange
course of negotiation of negotiable instruments, a series of juridical ties between a. Drawer – one who gives the order to pay money to a third party
the parties thereto arise either by law or by privity. b. Drawee – person to whom the bill is addressed and who is ordered to pay. He
becomes an acceptor when he indicates his willingness to pay the bill
Applicability: c. Payee – party in whose favor the bill is drawn or is payable.
General Rule: The provisions of the NIL are not applicable if the instrument involved is
not negotiable. DISTINCTIONS
Exception: In the case of Borromeo vs. Amancio Sun, 317 SCRA 176, the SC applied
Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which PROMISSORY BILL OF EXCHANGE
was signed in blank to facilitate future assignment of the same shares. The SC observed NOTE
that the situation is similar to Section 14 where the blanks in an instrument may be filled up Unconditional promise Unconditional order
by the holder, the signing in blank being with the assumed authority to do so.
The NIL was enacted for the purpose of facilitating, not hindering or hampering
Involves 2 parties Involves 3 parties
transactions in commercial paper. Thus, the statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a Maker is primarily liable Drawer is only secondarily
single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, March 23, 2004 Callejo J.) liable
Only one presentment: Two presentments: for
Kinds of NI for payment acceptance and for
1. PROMISSORY NOTE (PN) payment
An unconditional promise in writing by one person to another signed by the maker
engaging to pay on demand or at a fixed or determinable future time, a sum certain in NEGOTIABLE NON-NEGOTIABLE
money to order or to bearer. (Sec. 184) INSTRUMENTS INSTRUMENTS
Only NI are governed by Application of the NIL is only by
2. BILL OF EXCHANGE (BE) the NIL. analogy.
An unconditional order in writing addressed by one person to another, signed by the Transferable by Transferable only by
person giving it, requiring the person to whom it is addressed to pay on demand or at a negotiation or by assignment
fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) assignment.
A transferee can be a A transferee remains to be an Death of a drawer of a Death of the drawer of a
HDC if all the assignee and can never be a HDC BOE, with the check, with the knowledge
requirements are knowledge of the bank, of the bank, revokes the
complied with does not revoke the authority of the banker to
A holder in due course All defenses available to prior authority of the drawee pay.
takes the NI free from parties may be raised against the to pay.
personal defenses last transferee May be presented for Must be presented for
payment within payment within a
reasonable time after its reasonable time after
last negotiation. its issue.
In determining the negotiability of an instrument, the instrument in its entirety and Payable in sum certain in money
by what appears on its face must be considered. It must comply with the An instrument is still negotiable although the amount to be paid is expressed in currency
that is not legal tender so long as it is expressed in money. (PNB vs. Zulueta, 101 Phil
requirements of Sec. 1 of the NIL. (Caltex Phils. v. CA, 212 SCRA 448) 1071, Sec.6 (e)).
The certainty is however not affected although to be paid:
a. With interest; or
The acceptance of a bill of exchange is not important in the determination of its b. By stated installments; or
negotiability. The nature of acceptance is important only on the determination of c. By stated installments with an acceleration clause;
the kind of liabilities of the parties involved (PBCOM vs. Aruego, 102 SCRA 530) d. With exchange; or
e. With cost of collection or attorney’s fees. (Sec. 2)
REQUISITES OF NEGOTIABILITY The dates of each installment must be fixed or at least determinable and the amount to
a. It must be writing and signed by the maker or drawer be paid for each installment.
Any kind of material that substitutes paper is sufficient. A sum is certain if the amount to be unconditionally paid by the maker or drawee can be
With respect to the signature, it is enough that what the maker or drawer affixed determined on the face of the instrument and is not affected by the fact that the exact
amount is arrived at only after a mathematical computation. (Notes and Cases on Banks,
shows his intent to authenticate the writing. (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
b. Unconditional Promise or Order to pay a sum certain in money
Unconditional promise or order ACCELERATION INSECURITY EXTENSION
Where the promise or order is made to depend on a contingent event, it is CLAUSE CLAUSE CLAUSE
conditional, and the instrument involved is non-negotiable. The happening of the A clause that Provisions in the Clauses in the face
event does not cure the defect. renders whole debt contract which of the instrument
The unconditional nature of the promise or order is not affected by: due and allows the holder that extend the
a) An indication of a particular fund out of which reimbursement is to be made, or demandable upon to accelerate maturity dates;
a particular account to be debited with the amount; or failure of obligor to payment if he a. At the option of
comply with certain deems himself the holder;
b) A statement of the transaction which gives rise to the instrument
conditions. insecure. b. Extension to a
Where the promise or order is subject to the terms and conditions of the further definite time
transaction stated, the instrument is rendered non-negotiable. The NI must be at the option of the
burdened with the terms and conditions of that agreement to destroy its maker or acceptor
negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.) c. Automa –tically
But an order or promise to pay out of a particular fund is NOT unconditional. upon or after a
(Sec. 3) specified act or
event.
Instrument is still Instrument is Instrument is still
FUND FOR REIMBURSEMENT PARTICULAR FUND FOR PAYMENT negotiable rendered non- negotiable (Notes
Drawee pays the payee from his There is only one act- the drawee pays directly negotiable and Cases on
own funds; afterwards, the from the particular fund indicated. Payment is because the Banks, Negotiable
drawee pays himself from the subject to the condition that the fund is holder’s whim and Instruments and
particular fund indicated. sufficient. caprice prevail other Commercial
Particular fund indicated is NOT Particular fund indicated is the direct source of without the fault Documents,
the direct source of payment but payment. and control of the Timoteo B. Aquino)
only the source of maker
f. The holder of an office for a time being
b. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be negotiated by mere
III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17) delivery.
2. If payable to order, a NI may be negotiated by indorsement completed by
a. Discrepancy between the amount in figures and that in words – the words prevail, but if delivery
the words are ambiguous, reference will be made to the figures to fix the amount. Note: In both cases, delivery must be intended to give effect to the transfer of instrument.
b. Payment for interest is provided for – interest runs from the date of the instrument, if (Development Bank vs. Sima Wei, 219 SCRA 736)
undated, from issue thereof. c. Incomplete negotiation of order instrument
c. Instrument undated – consider date of issue. Where the holder of an instrument payable to his order transfers it for value without
d. Conflict between written and printed provisions – written provisions prevail. indorsing it, the transfer vests in the transferee such title as the transferor had therein and
e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the he also acquires the right to have the indorsement of the transferor. But for the purpose of
holder may treat it as either at his election; determining whether the transferee is a holder in due course, the negotiation takes effect as
f. If one signs without indicating in what capacity he has affixed his signature, he is of the time when the indorsement is made. (Sec. 49)
considered an indorser. d. Indorsement
g. If two or more persons sign “We promise to pay,” their liability is joint (each liable for his Legal transaction effected by the affixing one's signature at the:
part) but if they sign “I promise to pay,” the liability is solidary (each can be a. Back of the instrument or
compelled to comply with the entire obligation). (Sec. 17) b. Upon a paper (allonge) attached thereto with or without additional words specifying the
person to whom or to whose order the instrument is to be payable whereby one not only
IV. TRANSFER AND NEGOTIATION transfers legal title to the paper transferred but likewise enters into an implied guaranty
that the instrument will be duly paid (Sec. 31)
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) GENERAL RULE: Indorsement must be of the entire instrument.
a. Issue EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the
b. Negotiation residue. (Sec. 32)
c. Presentment for acceptance, in certain kinds of Bills of Exchange
d. Acceptance Kinds of Indorsement:
h. Dishonor by non-acceptance A. SPECIAL – Specifies the person to whom or to whose order, the instrument is to be
i. Presentment for payment payable (Sec. 34)
j. Dishonor by non-payment B. BLANK – Specifies no indorsee:
k. Notice of dishonor 1. Instrument becomes payable to bearer and may be negotiated by delivery (Sec.
l. Discharge 34)
2. May be converted to special indorsement by writing over the signature of indorser
MODES OF TRANSFER in blank any contract consistent with character of indorsement (Sec. 35)
a. Negotiation – the transfer of the instrument from one person to another so as to C. ABSOLUTE – One by which indorser binds himself to pay:
constitute the transferee as holder thereof. (Sec.30) 1. Upon no other condition than failure of prior parties to do so;
b. Assignment – The transferee does not become a holder and he merely steps into the 2. Upon due notice to him of such failure.
shoes of the transferor. Any defense available against the transferor is available against the
D. CONDITIONAL – Right of the indorsee is made to depend on the happening of a
contingent event. Party required to pay may disregard the conditions. (Sec. 39) V. HOLDERS
E. RESTRICTIVE – An indorsement is restrictive, when it either:
a. Prohibits further negotiation of the instrument; or HOLDER
A payee or endorsee of a bill or note who is in possession of it or the bearer thereof.
b. Constitutes the indorsee the agent of the indorser; or (Sec. 191)
c. Vests the title in the indorsee in trust for or to the use of some other persons. But
mere absence of words implying power to negotiate does not make an RIGHTS OF HOLDERS IN GENERAL
indorsement restrictive. (Sec. 36)
(Sec. 51)
F. QUALIFIED – Constitutes the indorser a mere assignor of the title to the instrument. a . May sue thereon in his own name
(Sec. 38) b. Payment to him in due course discharges the instrument
It is made by adding to the indoser's signature words like "sans recourse,” “without The only disadvantage of a holder who is not a holder in due course is that the
recourse", "indorser not holder", "at the indorser's own risk", etc.
G. JOINT – Indorsement payable to 2 or more persons (Sec. 41) negotiable instrument is subject to defenses as if it were non-negotiable. (Chan Wan vs.
H. IRREGULAR – A person who, not otherwise a party to an instrument, places thereon
his signature in blank before delivery (Sec. 64) Tan Kim, 109 Phil. 706)
SHELTER RULE
A holder who derives his title through a holder in due course, and who is not himself a VII. PARTIES WHO ARE LIABLE
party to any fraud or illegality affecting the instrument, has all the rights of such former
holder in respect of all prior parties to the latter. (Sec. 58) PRIMARY AND
SECONDARY WARRANTIES OF PARTIES
LIABILITY OF PARTIES
ACCOMMODATION Impose no direct obligation to
A legal arrangement under which a person called the accommodation party, lends his Makes the parties liable pay in the absence of breach
name and credit to another called the accommodated party, without any consideration. to pay the sum certain in thereof. In case of breach, the
money stated in the person who breached the
Accommodation Party (AP) instrument. same may either be liable or
Requisites: barred from asserting a
particular defense.
1. The accommodation party must sign as maker, drawer, acceptor, or indorser;
2. He must not receive value therefor; and Conditioned on Does not require presentment
3. The purpose is to lend his name or credit. (Sec. 29) presentment and notice and notice of dishonor.
of dishonor (Campos (Campos and Lopez-Campos,
4.
and Lopez-Campos, Negotiable Instruments Law,
Note: “without receiving value therefor,” means without receiving value by virtue of the
Negotiable Instruments 1994 ed.)
instrument. (Clark vs. Sellner, 42 Phil. 384)
Law, 1994 ed.)
Effects: The person to whom the instrument thus executed is subsequently negotiated
has a right of recourse against the accommodation party in spite of the former’s knowledge
that no consideration passed between the accommodation and accommodated parties. 1. Primarily Liable (Sec. 60 and 62, NIL)
(Sec. 29)
MAKER ACCEPTOR OR DRAWEE
Rights & Legal Position: A. Engages to pay A. Engages to pay according
1. AP is generally regarded as a surety for the party accommodated; according to the tenor of to the tenor of his acceptance;
2. When AP makes payment to holder of the note, he has the right to sue the the instrument; and B. Admits the existence of the
accommodated party for reimbursement. (Agro Conglomerates, Inc. vs. CA, 348 SCRA B. Admits the existence drawer, the genuineness of his
450) of the payee and his signature and his capacity and
capacity to indorse. authority to draw the
Liability: Liable on the instrument to a holder for value notwithstanding such holder at the instrument; and
time of the taking of the instrument knew him to be only an accommodation party. Hence, As C. Admits the existence of the
regards, an AP, the 4th condition, i.e., lack of notice of infirmity in the instrument or defect in payee and his capacity to
indorse.
or paid, or both, payee.
A bill of itself does not as the case may
operate as an assignment of be, according to
funds in the hands of the its tenor; and
drawee available for the
payment thereof and the C. If the
drawee is not liable unless and instrument is
until he accepts the same dishonored and
(Sec.127) necessary
proceedings on
dishonor be duly
taken, he will
pay to the party
entitled to be
paid.
2. Secondarily Liable (Sec. 61, 64 and 66, NIL) 3. Limited Liability (Sec. 65; Metropol Financing v. Sambok, 120 SCRA 864)
F. FRAUD
FRAUD IN FACTUM OR FRAUD IN ESSES
FRAUD IN CONTRACTUS OR FRAUD IN
INDUCEMENT EXECUTION
The person who signs The person is induced to sign an
the instrument intends to instrument not knowing its
sign the same as a NI character as a bill or note
but was induced by fraud
H. PRESCRIPTION
Refers to extinctive prescription and may be raised even against a HDC. Under the Civil
Code, the prescriptive period of an action based on a written contract is 10 years from
accrual of cause of action.
I. MATERIAL ALTERATION
Any change in the instrument which affects or changes the liability of the parties in any
way.
Effects:
1. Alteration by a party – Avoids the instrument except as against the party who made,
authorized, or assented to the alteration and subsequent indorsers.